Examination of Witness (Questions 300-319)|
TUESDAY 2 JULY 2002
300. Good morning, thank you for coming to the
Committee this morning. Could you introduce yourself, please?
(Ms Keegan) My name is Mary Keegan. I am Chairman
of the UK Accounting Standards Board.
301. Could you tell us what the function of
your Board is and how that fits into the International Accounting
(Ms Keegan) My function currently is the making, the
amending and the withdrawal of accounting standards relevant to
all UK companies. That function is likely to change in 2005. We
have the regulation which will require listed groups to use international
accounting standards for their group accounts. The question of
which accounting standards will be used for other accounts in
the UK remains to be a matter of consultation from the Department
of Trade and Industry.
302. The process of setting these standards
nationally and internationally does seem very leisurely. Are you
satisfied that the system can respond sufficiently quickly to
collapses like Enron?
(Ms Keegan) "Leisurely" is an interesting
word. It takes time to deal with the process of researching what
new issues have to be tackled, with consulting on those issues,
with going through due process and I am sure one would not wish
the standard setting process not to make due consultation publicly
in finally arriving at a new accounting standard. That is not
to say standard setters in my experience act in a leisurely manner.
One also has to look at the speed of change as regards the financial
information which companies are giving and therefore one has to
pace how many new standards can be introduced into the corporate
world at any time. There are of course both nationally and internationally
two tiers of accounting standard. There are the main standards
and there are what we in the UK call abstracts, internationally
called interpretations. Those act as top-ups to provide additional
guidance when it is perceived that a standard is not being used
properly. I will give you an example. We have a standard which
has long applied in the UK concerning when a financial instrument
is classified as debt or shareholders' funds. Last year we realised
in the UK that instruments were being issued which traded as debt
but were being classified as shareholders' funds. In January we
issued an Urgent Issues Task Force (UITF) abstract which clarified
how those particular instruments should be dealt with. We have,
yes, a slower process which requires due and full consideration
and consultation, but also an ability to top up where quick guidance
303. Is this really sufficient when you have
a crisis of confidence in accounting and auditing at the moment?
Your own memorandum says after Enron, "The ASB has, however,
already resolved that, as the facts do emerge, it should consider
whether any existing standards might need specific reconsideration".
This does not seem to be very dynamic.
(Ms Keegan) It is extremely dynamic. Let me deal very
specifically with our understanding of some of the issues relevant
to the Enron situation. One is the treatment of special purpose
entities. We have a standard in the UK, which we have had since
the mid-1990s, FRS 5 "Reporting the Substance of Transactions",
which many have told us deals very well with ensuring that most
special purpose entities (SPEs), if not all, are included in UK
accounts. Therefore a knee-jerk reaction is perhaps not needed
to try to issue a new accounting standard in that area where we
have SPEs well dealt with in UK accounts. That is not to say we
are complacent about the standard. We perceived one area last
year where SPEs were not well included. Again a UITF abstract
was issued on that subject, "Employee Benefit Trusts"
which were being dealt with outside the balance sheet.
304. Why do I have the impression that you are
still strolling around looking for the stable door to bolt long
after these horses have gone? It does seem rather complacent.
(Ms Keegan) Which horses?
305. We have had a whole series of these scandals
and crises of confidence, some of which do have UK implications.
You are telling us that you might need to reconsider this or you
might consult on that.
(Ms Keegan) One of the most urgent subjects for the
UK to tackle is the use of fair values to ensure that derivatives
are properly shown in financial accounts and that financial instruments
are properly recorded at their fair value. We have just issued
an exposure draft on that subject. We cannot, however, implement
that exposure draft as a standard in UK accounting without some
changes in the law. That requires law both at European level and
then amendment to UK law. In that case it is the legislators holding
us back and not the standard-setting process.
306. You are waiting for the company law review.
(Ms Keegan) No, we are waiting for amendment to the
EU company law directives which can then be brought into the UK
307. Who funds your board?
(Ms Keegan) The Financial Reporting Council (FRC)
which acts as the umbrella body for the ASB and the review panel.
The FRC is funded one third by the accountancy profession, that
is funding from the institutes, one third by Government through
the DTI and one third by business. Most of that one third from
business derives from a levy administered by the FSA. We do not
have direct individual corporate funding.
308. Is it satisfactory for two thirds of your
funding to be coming from the people your accounting standards
then apply to? Does it make you sufficiently independent?
(Ms Keegan) I believe it does. I believe the mechanism
which was brought in in the early 1990s, which is effectively
a partnership between business, the accountancy profession and
Government in supervising the setting of standards in the UK is
a very satisfactory situation and allows no one group to dominate
309. No one group is, but nevertheless if you
trace back then the sources of where that funding is coming from,
it is coming from the people you in turn are setting the rules
for as to how they do their accounting. Can you not understand
why looking from the outside it rather looks, as we have just
heard from Lord Sharman, a high probability of the piper playing
(Ms Keegan) May I repeat my explanation of the third
of funding which comes from business? The major part of that derives
from an across the board levy imposed on listed companies and
administered by the listing authority within the FSA. It is not
individual companies subscribing to the work of accounting standard
310. Are you entirely satisfied that no question
of compromising your objectivity arises from the way your board
(Ms Keegan) Yes, I am entirely satisfied.
311. Are you attempting to deal with the issue
of aggressive earnings management?
(Ms Keegan) Yes. There is a variety of ways in which
aggressive earnings management arises. Perhaps one of those is
the question of revenue recognition. This is a subject we are
tackling. We issued a discussion paper last July. We are proceeding
with converting that discussion paper, consultation paper, into
a draft accounting standard. You would recognise though from my
explanation of where the UK is going towards international standards
in 2005, that today may not be the moment unilaterally to issue
a UK standard. In May we presented a paper to the IASB and to
other national standard setters around the world. The IASB has
now announced that it is taking the subject of revenue recognition
onto its agenda. We hope to be working quite fast with IASB to
provide a revenue recognition standard for the future.
312. While of course I understand that there
is to be an international approach to these accounting standards
issues, do you not think the situation in the financial markets,
the issue of investor confidence, is such that it would be sensible
to produce some standards to deal with the issue of aggressive
earnings management now?
(Ms Keegan) It is a subject we need to keep very much
in focus. If I may say so, the question of earnings management
derives from standards for a number of areas. Earnings is the
composite figure of a number of accounting computations. I focused
first on revenue. Revenue recognition issues have been very much
in the profile of debate. There are other issues, for example
the management of costs, which we keep very clearly under review.
Last month, for example, we published a UITF abstract which severely
restricts companies, for example bidding for PFI contracts, from
deferring costs to manage those through the earnings procedure.
The UITF abstract now requires all those companies to write off
bid costs effectively in advance of award of contract.
313. When do you expect some standards, whether
nationally derived or internationally derived, to deal with the
issue of revenue recognition which you have correctly identified
as being the core issue?
(Ms Keegan) I think you must address that question
to Sir David Tweedie who follows me, because that will be a matter
of international timing. We could push ahead and issue a UK standard
possibly in another year, but issuing a UK standard on revenue
recognition in 2003, when our listed groups are going to international
standards at 2005 does not seem entirely appropriate. We need
to work to get one consistent answer on revenue recognition internationally,
most of all because then we do not get differential solutions
between the UK and the USA for example.
314. Do you ever come under pressure from Government
either to advance certain kinds of work or to delay them?
(Ms Keegan) I have never encountered such pressure.
315. FRS 17?
(Ms Keegan) I have not encountered pressure from Government
to change FRS 17. I have announced this morning a delay in the
full adoption of FRS 17 pending reconsideration of the international
standard. I am optimistic that will be a very temporary delay
whilst the International Board comes to a conclusion on its international
standard. Meanwhile all the FRS 17 information will continue to
be disclosed in the notes to the accounts.
316. That is interesting information for the
Committee and it is not something we can properly absorb. How
long do you think this delay will be in the adoption of FRS 17?
(Ms Keegan) Very short I hope, because after all the
International Board has the perfect solution which it can adopt
from the UK rather than picking up the US solution.
317. But that is speculative. In terms of programme
and timetables which are in your controlI accept the point
about IASB and we are shortly to hear Sir David, but we cannot
lay it all off on them. In your own programmes and timetables,
when are you expecting to have FRS 17 fully working?
(Ms Keegan) If the UK were not moving to international
accounting standards at 2005, then FRS 17 would be mandatory for
all company accounts from June 2003. I am hoping that we might
get an international exposure draft at the beginning of 2003 and
that might convert to a standard, in my own view, possibly by
the end of 2003/beginning 2004. I am optimistic that the delay
will only be for one year. Meanwhile, may I emphasise that all
the FRS 17 information will continue to be given in the notes
to the accounts.
318. Does that not rather lend strength to the
feeling that things are a little bit leisurely?
(Ms Keegan) Not at all. I am merely trying to manage
the process of companies reporting information into the marketplace
so that we should not have two changes to how we account in the
main accounts for pensions; two changes potentially within two
years. I do not believe the market is necessarily better served
by having two rapid changes than having a slight delay and the
ultimate answer which will survive.
319. I asked earlier about the function of your
Board and how it fits in with the International Accounting Standards
Board. I should like to look at that in more depth. Given the
decision to move within Europe to international standards for
quoted companies, how will the role of the Accounting Standards
Board change in the future? What will it look like in 2005? Will
there be a comprehensive set of international standards then?
If so, will the national standards still be in force?
(Ms Keegan) I shall repeat my earlier
answers, if I may? The question of whether we shall continue to
have something called UK accounting standards will depend on Government
decision, following a consultation which it intends to begin this
summer. At the moment at the Accounting Standards Board we are
working on the view that we will continue to have UK accounting
standards and that in almost every respect those should be identical
with the international accounting standards. For example, in May
we issued some exposure drafts to propose replacing current UK
standards with certain new proposals from the IASB. Our vision
from the ASB is that our UK accounting standards should in almost
all respects be identical with international ones. There may however
be topics on which cost benefit decisions mean that we do not
enforce certain aspects of capital markets accounting on unlisted
companies. As to the role of the UK Accounting Standards Board
and indeed other national standard setters in the world going
forward, I should like to believe that they will survive and be
much the same as they are today, not necessarily setting standards
but certainly working with the International Accounting Standards
Board in developing solutions. The world would be a poorer place
if we had all accounting thinking just in one place. We need the
national bodies in some form or description to be able to look
at new solutions for accounting, to be able to propose those internationally
and most of all to make sure that the voice of UK constituents,
for example, is heard in the international debate and that the
international standard setter does not set standards which are
inexplicableif I may put it in those termsfor application
in our business environment. We are looking towards having one
set of financial reporting standards for the world, but for some
time to come we expect our business environments to be slightly
different from one country to another. We have to make sure therefore
that the international accounting standards can be properly used
in those different business environments and that is what I see
as the future role of a national accounting body.